The study constructs a monetary policy indicator (MPI) from monetary policy documents and the actions of the Bank of Jamaica and Ministry of Finance and Economic Planning, and uses it to estimate four variants of an analytical narrative-vector error correction model (AN-VECM) with cointegration as the identifying restriction. Mostly one-way short run causality seems to run from the individual controls to financial development but there is some evidence of reciprocity. Cash reserve requirement proves to deepen the financial system while statutory liquidity requirement and directed credit programmes show a negative interaction with financial development.

Based on the DOLS estimator, the evidence on interest rate restraints points out to ambiguous long run effects on the different indicators for financial development. The outcome of the different techniques used point out towards a positive and significant relationship of the different policies, formulated as an index by way of principal component analysis (PCA).

Causality tests are applied to highlight the appropriateness of the different policies imposed following results of their direction of causality. A VECM is initially formulated to capture the long run effect of the different banking policies used, followed by a dynamic ordinary least squares (DOLS) estimation to cater for unknown small sample properties of a VECM. This study brings to light financial deepening in an all new angle by introducing banking sector controls as its possible determinants and that, to be considered for the Mauritian experience. Financial development has received considerable attention in past literature.

Nexus 18.12